Criteo S.A. (CRTO) Earnings Call Transcript & Summary

All right. Great. Thank you, everybody. Let's get started. My name is Ron Josey, I cover -- lead coverage the Internet sector here at Citi. And very happy to have with us today Michael Komasinski -- I butchered your last name.

Pretty clear.

Was that good? Okay. Komasinski. Yes. So I wasn't going to say new CEO, but not new CEO. We're 18 months in. Criteo, I think we all know what Criteo does, but bottom line is has one of the largest identity graphs out there, I believe, and leverages this data set and shopper graphs to basically help to drive greater sales for retailers and advertisers full stop. With that, I'll let you do a better job of explaining this directly. But Michael, I just want to say thank you for joining us. And why don't we kick off specifically just talk to us you're 18 months in the CEO role. A lot is changing in the industry, a lot's changing at Criteo. And so maybe quickly tell us about Criteo the business. Most people know already, but then sort of where are you focused here as we move forward in this new world of agentic advertising?

Sure. So I'd start like at the highest level. So Criteo is a commerce intelligence platform, right? And we picked those two words like very purposefully. We believe that commerce really is the organizing construct for advertising and marketing in a world where everything is shoppable and biddable. And then the intelligence part comes in, like how do you allocate media investment optimally across what is an increasingly fragmented ecosystem of places where people spend time, where they shop, where they make decisions. So really, the future is about how do you drive commerce outcomes in a more complicated ecosystem in a very sort of AI-driven and highly automated way. So that's kind of the set of the north stars or the things that we believe in, I think, at the highest level. How the company actually accomplishes that, I'll try not to get too complicated with it. But -- we have several different data sets that we use to drive that decision-making of where to place optimal client investment. So you mentioned one of them. The identity graph, it is the third largest identity graph in the world. We have the third largest product catalog in the world. We are incredibly good at ingesting 25 billion raw SKUs, some updated as frequently as hourly and then processing that -- and normalizing that data set into a SKU catalog of about 5 billion SKUs globally.

Michael tell you about the third largest product catalog in the world? And you mentioned 25 billion?

25 billion is the raw SKU count that we ingest on a regular basis, yes. And so what you need to do is you need to be able to normalize that down to something that's usable so that this vacuum cleaner that's got just a slightly different aspect is the same thing as that vacuum cleaner and you normalize those two things together basically. When you combine identity with product catalog with then the shopper graph, which is the events timetable of what do people browse, what do they consider, what do they do on site. And how do the learnings from that help you determine where to place the next best or the next investment or the impression to buy, that's basically the three data sets that combine to enable that. So without getting sort of too deep on the science. And those data sets are reinforced with the client relationships that we have. So through the ability to ingest product information, availability and landing activity on site, that becomes a self-reinforcing loop that makes our performance better and better over time. So if I keep going with a little bit of the lead into the question, the focus areas for the company at the highest level are really threefold. One, to innovate and lead the industry in agent commerce. And the kind of two interesting use cases there would be retailers developing new agentic shopping services and how do we power those for them, as well as true pure-play agentic channels like paid advertising on OpenAI, where we're their leading ad tech partner globally. Second priority would be continuing to innovate and maintain our industry leadership in the fast-growing Retail Media channel, and we can come back to that in some detail. And the third would be to reenergize our Performance Media segment by making it more cross channel, which enables us to conquest new budgets in the funnel. So we sometimes refer to that as the full funnel cross-channel strategy. I think if we execute on Agentic Retail Media leadership and reenergizing Performance Media, then this is a really exciting business over the next couple of years.

I want to sort of follow up on that last one on reenergizing Performance Media. I think you said making it cross-channel, full funnel. Understood the vision where are we coming from? So are we not doing that prior?

No. But for good reason, right? So if you need to back up a couple of years, like back into maybe kind of 2023, 2024 before I arrived. The company would have been very focused on addressability and essentially Google's privacy sandbox effort. So that would have consumed a lot of attention in that time frame, right? And rightfully so. So it was not as much product innovation going on at that time. And so I was fortunate to arrive at Criteo at the time that I did because about 2 months after I joined, Google backtracked on the privacy sandbox proposal. We essentially have now an addressability landscape that is more or less unchanged from where it was 2 or 3 years ago. And I think also the regulatory environment and other factors suggest that, that is a very stable foundation to build on. And so I wanted to embark on a more growth-oriented agenda for that segment by pursuing the full funnel cross-channel strategy. So start to innovate channel connections, again, which enables us to conquest mid- or even upper funnel budgets, which is how you grow a performance platform.

Yes. Super helpful. I have more questions on this big three. But before I do, I wanted to talk a little bit about the leadership team. I think Connor, who is in the audience, just announced CFO, you're in the market for a new Chief Product Officer, if I'm not mistaken. So talk to us about where we are from a leadership team, and then we'll go from there.

Yes, definitely. So I mean, I think, first of all, it's worth reminding people like -- we've got an incredibly strong bench in the company across all the different disciplines. And then we've got a very rigorous and methodical approach to cultivating our succession plans and then ensuring smooth transitions when it's time to do that. And so Connor coming into the CFO role is a good example of that. He's been with the company for 8 years, had been on the succession plan for some time, and really has the perfect background for what we need as a company right now. Connor's got a strategy background, ran our partnerships group, understands the ecosystem, I think, is better than almost anyone I know in the industry. And with 8 years in the company has got a lot of familiarity with how we work and how we operate, but also has some deep opinions on things that we can change. And so a fresh perspective, I think, is always a good thing, and this was a very methodical, well-thought-out transition and with a candidate that hits the ground running 60 miles an hour out of the gate. And then on the Chief Product Officer side, Todd did a great job in his 6 years at Criteo in terms of navigating the privacy sandbox situation that I talked about. And then really being the architect of the full-funnel, cross-channel self-service strategy that we are going to continue on. Todd had a long-time ambition to be the CEO of a company and has a fantastic opportunity to do that. So leaves us with a great bench of talent that he's brought in and is a very natural progression to his personal career journey. We wish him well on that. And so we currently have our senior product team reporting into Diarmuid Gill, our Chief Technology Officer. And we're in the hunt for a new Chief Product Officer with a great bench of talent at the next level down. So don't need to change the strategy in any big way and have a great bench and a good interim set up. So I'm very comfortable with where we are.

Perfect. And that dovetails into the three key focus areas don't need to change the strategy. You have the tools for Agentic Retail Media.

Correct. I mean we're always reacting and pivoting and improving how we scale those strategies. But Agentic, Retail, Performance, nothing changes with that strategy. And I think the major elements within each of those?

Perfect. I want to get into the data set and agentic commerce here, particularly around your partnership. But before we do, just to level set to us post 2Q, there was a little bit of a budget reset, I feel, around some of your largest clients in Performance Media. Talk to us about the visibility into the business. I think we saw qualified pipelines are actually up quite nicely. I think we saw U.S. new business revenue up quite nicely. But then we also have some of your largest clients pulling back. Are we -- is that behind us? Or how do we think about these two?

Yes. So coming into the year, we started to notice some softness in budgets with a handful of large clients. And then that trend continued across Q2. And that's what got us to the downgrade that we announced in August at earnings. And we wanted to give ourselves a prudent outlook given that we'd had to do that twice. And since then, we saw trends stabilize in the July time frame. And then also the commercial teams, I think, really on top of each of those situations. In some cases, that is just competing more effectively for budget shift, budget moves from one tactic to another, and as Criteo, we have enough products to satisfy both needs. We need to make sure that, that's a left pocket, right pocket shift for us. Some things were maybe macro that were out of our control, but that's going to happen, and that's why it's important to have a new business machine that can bring in new revenue that offsets the inevitable fluctuations that clients will have, and those are some of the stats that we shared at the August call, right? So new business performance in the U.S. have been up 24% year-on-year, which is a really good signal and I would say, attributable to -- some of the talent that Ed has brought into the business since he joined in January. And then we noticed that qualified pipeline was up significantly, I think, in the mid-30s and overall pipeline has now come in over 50% from agencies. So a lot of the things that we've talked about coming to bear. And I think like to the point, that situation has now stabilized. Each account is a little bit of a different situation. And it's just game on to now get some of that share of budget back into the business. and make sure that we follow through on new business efforts.

And what changed in July that you said trends have stabilized?

Yes. I think it could be attributable probably to some of the commercial efforts in some cases, or maybe some macro factors abating, probably a mix of the root causes that I went through there.

Okay, yes, that's great. So one of the questions that we often get, I want to get into the data set and everything else because clearly, that's the asset of the company. But the questions we're getting is the Criteo and OpenAI's partnership. And I think you mentioned like if we can focus on all the three things, Agentic Commerce was one of the first ones. So tell us a little bit more, I think, about your partnership with OpenAI. Specifically, I think you now have, what, 2,000-plus clients on. There were a slew -- there was a release not too long ago of continued strength. So let me just make it a high level how does this partnership come about? Why did they choose you and talk to us about the evolution of how that's going?

Sure. So I think the reason that they chose us is multifold here. But it basically comes down to we look at advertising in very similar ways. Like us Criteo, we don't start with sort of reach and frequency as our starting point. We start with what product do you want to advertise? And what is the context and the relevancy that triggers that? And sort of how do I drive to a commerce outcome, right? And that is the way that the OpenAI ad platform is architected. And so it gets into a lot of the value add and the way that our partnership fits together. We -- I'd like to say we optimize the inputs. So what SKUs am I going to advertise is the data associated with those SKUs up to date? Is the metadata correct? Is it deep enough and rich enough to drive the relevancy signals? And then when it comes to prompts how do we engineer prompt that are insightful and comprehensive to maximize all relevancy display coming out of their engine. And then on the back end, how do I give insights into cross-channel measurement about how their paid referral traffic is performing relative to other paid referral traffic. So I call it optimizing the inputs and explaining the outputs. And that's a lot of the value that we provide. Now we do have a product to product or tech to tech relationship as well, but that is largely about us given the market feedback on feature function that needs to be developed, helping them with their road map. Ultimately, it's them building their platform, but it is quite a technical relationship week to week. And they announced a couple of weeks ago that they had gotten onto $1 billion a year run rate, which is exciting, opened up now in 51 markets globally, the European expansion and then the Middle East expansion. So that will start to drive client count, I believe, through the rest of the year in a pretty strong way. And really, what we want -- what they want is to move really from a lot of test budgets to always on budgets and to make them bigger. But with the efficacy we see in both mid-funnel and lower funnel, I'm pretty confident that those budgets will scale and that they will become part of always on plans. Just to pay that off a little bit. In the mid-funnel, there's an amazing statistics that we keep sharing because it keeps showing up in the data. And that is that 80% of paid referral traffic is new to brand, which is an amazing incrementality metric when you think about mid-funnel objectives. And then in the lower funnel, it converts 1.5 to 2x better than traditional search. So those are great conversion rates. And so lots of reasons to believe that those -- with that kind of performance, that kind of insight that, that will move from test budgets to always on and that it will pull investment from some other competing products in the mid or lower funnel.

So that -- where do you think budgets come from? Yes, because new to brand is interesting, better conversion rates that you mentioned.

The new to brand will put pressure on CTV budgets. It will put pressure on some social budgets. I mean those are the places that you derive new customers, primarily. And then in the lower funnel, I think it will put pressure on certain tactics within search, certainly, product listing ads or PLAs maybe even depending on like the CPCs you're seeing could be even branded search, but not all of traditional search, but certainly some tactics within like economically, you'll just get better performance on OpenAI. And look, if they're driving incremental outcomes, there certainly could be some incrementality as well just in terms of overall ad spend as a percent of GDP.

Open to 51 markets now? Last metric we heard was 2,000 advertisers. Who are these advertisers? And how quickly are they able to go from test to actual line item?

Yes. So look, Criteo has quite a varied and global client base. I think that is one of the other reasons that they chose to partner with us, right? We have 17,000 clients globally. And it is particularly strong in the mid-market. And so that is a lot of the 2,000 that we're working with on their behalf. And think a client typically needs about 2 months of testing, go through a couple of weeks per campaign to do evaluation and tweak it, run it again, so it probably takes about 2 months to start to get to some comfort level of how it's performing relative to other tactics. I would say two milestones we're looking forward to will be holiday season this year, so kind of come October, November, how many clients are choosing to invest in OpenAI as a mechanism to drive their holiday objectives. I think that will be an interesting signal for all of us, everyone in the ecosystem, let alone Criteo and OpenAI. And then early next year, lots of brands and advertisers tend to set budgets at the beginning of the year by platform, by tactic for their always on. So I think that's another signal kind of Q1 that we would get a read on. Not that those have to stay fixed over the full year, but that is a pretty typical client approach to set those early in the year.

I want to get into the impact, so not to spend the whole time on OpenAI, but two other quick questions because I think Agentic Commerce can potentially change how we shop if you have an agent helping you find what you're looking for that you may or may not know exist. So question number 1 is we talked about two milestones holiday this year, do we have enough product with the advertisers on ChatGPT to be meaningful for users? I know we talked about your product catalogs. So I'm bringing it back to Criteo's product catalog. That's point one. And point two, the impact of Criteo itself. So when can we get on the call and you and Connor can say it's now incremental or adding more so to growth.

Yes. So there's enough product for sure. What we continue to work with them to tune the relevancy engine to improve budget completion and fill rate. And so that's just a work in progress. And as they develop now some of the additional performance capabilities like optimize CPC, the CAPI measurement program that they introduced about a month or so ago, even little things like exclusion lists. I think that all starts to drive volume and help command larger budgets. For us, we've continued to be conservative about guiding on performance just because it's decent client count, but relatively small budgets per -- we believe that it will be a meaningful contributor to 2027, and we're continuing to talk about how we're going to give guidance on that. We want to give guidance on that. It's an exciting part of our business. We need to be mindful about starting to guide to some kind of a statistic then that we can update regularly with confidence. But meaningful is the word that we keep using for now. And again, everyone's interest aligned. We really want to guide on something for this next year. So we're going to figure that out.

Perfect. So maybe moving on to Retail Media. Specifically, I think some of your core offerings like Commerce Max, sponsored products, was a page intelligence, conquesting. Just how do you see retail media evolving here?

Yes. Yes, it's really great actually because when I joined -- shortly after I joined, I had the sort of misfortune of a pretty big news event with our largest retail client taking some, I call them, legacy scopes of work in-house because they very much continue to use our technology. But since then, the business has really embarked on being more diversified. That's both strategic on our part, but it's also what the market is sending us as a signal. So retailer ad stack is becoming more diverse in that there's opportunities for an ad server for sponsored products. There is an opportunity for an ad server to serve display and online video, there's an opportunity for a mediation layer. There's an opportunity to optimize, paid and organic and what shows up on a product listing page, conquesting, right? So there's a lot of different monetization tactics now that as these Retail Media networks get bigger and more sophisticated, they really have an appetite for. And so we're just building to market demand. But the nice benefit of that is it diversifies the business so that we're not sort of so binary on if you're not the sponsored ad server, you're just in or out. And obviously, that's not always a great situation. So being more diversified, I think, allows you to evolve with clients, bring them more product. And if they ever did in-house something that you still have a role to play in the stack, and that's just talking to supply side, right? On the demand side, with Commerce Max, we continue to introduce new insights features, new capabilities for how cross retail campaigns are run and measured, and that's the core value proposition there because you want to make running Retail Media as frictionless as possible because that's really been the inhibitor on the advertiser side for scaling spend outside of the top 2 players. So that's our mission with Commerce Max, and we see really good results happening here over the summer with that.

That's great. And maybe the last one on just -- we talked about Agentic and Retail. Let's talk about Performance Media. We talked a little bit about it earlier. But how do you -- I think we talked about the privacy sandbox is going to take a little bit of wind out of the sails. What products can we look forward to, so that we can see that growth come back or...